Lipton Defends the Indefensible, Again and Again

Marty Lipton, the prominent Wachtell Lipton lawyer whom I have sparred with on numerous occasions, is no stranger to hyperbole about the "sanctity" of the corporate boardroom, but his latest comment about Anheuser-Busch is way over-the-top.

In a July 24 memo to clients (Corporate Governance Ratings Debunked), Lipton pointed out that the giant beermaker recently changed its bylaws to allow for yearly elections of directors, rather than every three years. As a result of this, the company was subjected to a hostile takeover by Belgian beermaker InBev, which was poised to run a proxy battle to get new directors elected to the board, asserts Lipton.

"Anheuser Busch is the latest US company to fall prey to a hostile takeover shortly after repealing its classified board in the name of adherence to best practices in corporate governance," Lipton said in the memo.

Unfortunately, Lipton has it all wrong in this classic anti-shareholder view. His opinion suggests that it is a good thing that the maker of Budweiser should be protected from takeovers to maintain the cozy "status quo" of its boardroom.

Fortunately, the directors of Anheuser Busch didn’t listen to Wachtell Lipton, but responded to shareholders who saw the InBev takeover as a positive thing – at the right price.

The deal, at $70 per share or $52 billion was a great thing for shareholders, sending the stock up to record highs. (We don’t hold Anheuser-Busch).

Lipton’s views are emblematic of the anti-shareholder views exemplified by pro-management groups like the Business Roundtable.

Over the years, Lipton has built a very lucrative law practice advising big corporate clients on some very clever ways to keep shareholders like hedge funds from having a strong say in companies they hold. He is credited with inventing the poison pill, one of the most anti-shareholder provisions ever devised.

The memo seems designed to scare more corporate clients not to change their bylaws for fear that they may be subjected to hostile takeover offers and lose their lucrative and cushy management jobs.

Lipton elaborated in a June 25 speech to the University of Minnesota Law School, where he decried a wave of new laws and court rulings that have favored shareholders in the wake of corruption scandals like Enron, Adelphia, Worldcom and a spate of others that lost billions of dollars for pension funds.

"Boards merit the vote of confidence of shareholders and the public markets," asserts Lipton. "History has proven this vote of confidence to be well deserved."

"I believe it is the only way to assure that public corporations will be able to compete with the state corporatism that is transforming the economies of China, Russia and other rapidly industrialized countries," he adds.

Actually, it is just the opposite. Shareholder activists are making their voices heard more often precisely because American corporations are failing and losing their economic hegemony globally to the detriment of our national economy.

This is happening because many boards didn’t challenge managements to address global threats that have been brewing for years. Board members must select managements that have the vision and the foresight to get ahead of the competitive curve.

The University of Michigan speech also contains some astounding contradictions and mental gymnastics in defense of the indefensible.

On the one hand, Lipton decries the fact that union-backed activist CtW Investment Group threatened a "vote no" campaign against 22 directors of six major banks unless they could provide satisfactory answers to what efforts they took to manage risk exposures at their banks.

This of course is a perfectly legitimate – and imperative – inquiry to bank directors whose institutions have taken billions of dollars in losses and threatened the viability of the entire financial system.

But Lipton’s response is basically, 'don’t bother the directors – they have too much on their plate.'

"We cannot afford continuing attacks on the boards of directors at a time when their full commitment and their most talented members are so acutely needed," says Lipton.

If billions of dollars in losses is what their full commitment and most talented members bring, they should seek employment elsewhere. We can’t afford directors like this anymore.

Comments

[Deepak Sethi]

I think Lipton is arguing that negative outside pressure runs counterproductive to positive change in a boardroom. However, these are big boys making big pay cheques.

They can handle it.

[Jeremy Foshee]

Carl,
I couldn't agree more. Most of the reporters and analysts want to use the pro-management propaganda machine and make excuses that it is the way to protect the company's employees without realizing that most employees are shareholders as well. At the very least they are stakeholders that companies in the M&A market want to bring into their organization as those people are the reason the buying company was interested in the property to begin with. Relics like Lipton need to take a realistic view of the corporate world today.

-Jeremy

[Ian D Smith]

An acquiror should be able to present a fair and full offer to the owners of the target company whether the owners are also minor shareholders. Many company bylaws prevent an acquirer being heard above the noise of the Board. So whether the bylaws present a changing of the guard every year or 2 or 3, the key must be to allow owners of companies to hear well thought out and fully funded offers from genuine acquirers. As an operator of businesses I have great sympathy with managers who claim takeovers are a huge distracton from their work but they must remember they are working for the shareholders not themselves.The argument that changing bylaws opens the floodgates to any acquisitive group is naive and misunderstands the planning and preparation done by many acquirers before embarking on the risky business of buying another company.Badly written bylaws do give weak management protection rights at odds with their fiduciary rights to shareholders.

[Jim Elam]

Carl,

In my humble opinion these crooks and dim-wits
should be put on a Wall of Shame. I say let the
market take care of these mistakes. Personally,
I don't care if the market goes down to 5,000
I'm sure there will be honest, brilliant, banks and institutions to take over the clients. The
market will rebound. I know of NO OTHER WAY to get rid of these greedy fools.

Secondly, this is a World Wide Problem. AIG's problems were in 120 countries. Henry Paulson
only acted when Goldman Sachs started crying.

Let's be frank. Congress is not adept in financial matters. They have proven dim-witted
for over 200 years dating back to New Amsterdam.

Deep down I feel that our shame full leaders
know this will never pass. It will give the
dirt bags time to sell their self to China
and other SWF's.

I saw the run on Taiwan and other Asian Insurance
Companies and Banks, I'm aware of the money market fund frees up. The only way to UNCLOG
this is to let it burn.

Correct me if I'm wrong, This bill would take
hours not days. That was Thursday night at about
9pm.. Congress will add the kitchen sink. There
will never be a vote.

This NO SHORT SALE is going to make matters worse. PONZI scheme. Over-valued stocks will
drop like a rock the day after Goldman & Morgan find a buyer. Only then will they lift the short rule.

King George's father was delt a similiar hand with the S&L crisis.

Is this the new bubble. Well blue smoke and mirrors will not work this time.

This will not create one more job. Or stop
the pathetic balance sheets. What happens when
they buy the bad paper. It's got to end up some where. Will they recycle it back to the bank to
get bought again?

Jim Elam